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    Expected growth rate of a stock

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    IBM just paid (t=0) a $2.00 dividend. The required rate of return for IBM stock is 22%. If a price of a share of IBM is expected to be $82.1516 at the end of year 2 (t=2), what is IBM's expected growth rate?
    possible answers:
    a)16% b)11% c)11.5% d)18% e)10.5%
    f)14.5% g)16.5% h)12% i)22.5% j)13.5%

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    Solution Preview

    Answer: d)18%
    D0 = $2.00
    D1 = 2(1+g)
    D2 = 2(1+g)^2
    D3 = 2(1+g)^3
    P2= ...

    Solution Summary

    The solution calculates expected growth rate of a stock given required rate of return, price and dividendusing dividend discount model.